The best time to open a retirement account is when you first start working. But what if you're not even an adult yet? Great news! Kids and teens with earned income can still save for retirement. Read on to learn more about why–and how!– you might want to help your kids open a custodial Roth IRA with Vanguard.
Why Open a Custodial Roth IRA
The short answer to why you should open a custodial Roth IRA is compound interest. The longer answer is the more time your money has to grow, the more it's worth!
Vanguard shows the difference $1 can be worth if you start investing at 20 compared to 55. It's the difference between turning that dollar into almost $6 versus just shy of $1.50. Obviously, we want to take the six bucks!
Compounding is even more powerful if you start before 20. By opening a retirement account as soon as your child has earned income, that money can grow for their future goals.
Opening a Custodial Roth IRA if You’re New to Vanguard
There are actually two different ways to open a custodial Roth IRA with Vanguard. The first one–especially helpful if you don’t already have an account with them–is to call Vanguard during normal business hours.
Call 800-551-8631 and ask to set up a custodial Roth IRA. You will be given a link to get the process started.
Not excited about having to make a phone call? Can’t connect with them during regular business hours? We’ve got a second option for you that we’ll share next!
How to Open a Custodial Roth IRA with Vanguard in 6 Steps
If you already have a Roth IRA with Vanguard or another account, you actually can set up a custodial Roth online. They just don’t make it easy!
Step 1 – Log into your Vanguard account
If you are already a personal investor with Vanguard, simply enter your username and password.
You can also create an account if you’re not currently a Vanguard customer. Then, you can bypass that phone call we talked about earlier.
Step 2 – Click on Transact
After you’ve logged into the Vanguard site, find the Transact link at the top left of the screen. Choose the option to Open an Account option.
Step 3 – Open a New Account
Find the option that says “Open a New Account with Money From My Bank” and click it. Then hit continue.
You'll have the option to choose self-guided or advice services. For what we're discussing today, it would make sense to choose self-guided, but this choice is up to you.
Be sure to read through the instructions about what comes next and as well as the requirements for opening an account. Then when you're ready hit “Select Your Account” to move to the next step and follow the prompts to open an investing account for a minor.
Step 4 – Follow the Account Wizard for a Brokerage Roth IRA
As a Vanguard account holder, you might recognize their account wizard. Choose Brokerage Roth IRA and fill in the fields with the information as prompted.
Key steps will be to make sure that you:
- Choose a Minor for the account owner
- Enter the minor’s personal information, including birthdate and Social Security number
- Identify your role as a Custodian
Step 5 – Fund the Account
After you set up the account, you can start to fund it. Just make sure that you are only investing earned income.
For instance, if your child earns $500 within the current year, the most money you can put into the custodial Roth IRA is $500 for that calendar year.
Step 6 – Invest the Money
Once there is money in the custodial Roth IRA, you want to explore different investment fund options. Make sure that you pay attention to minimums and fees!
Frequently Asked Questions
Vanguard works hard to streamline the process of opening an account. But it’s possible you still have questions.
Let’s explore answers to some of the most common questions about how to open a Custodial Roth IRA with Vanguard:
Can anyone open a Roth IRA?
Many people can open a Roth IRA, but not everyone!
If you want to open a custodial Roth IRA with Vanguard, you need to make sure that you meet the following criteria:
- Live and earn money legally in the United States
- Fall under the income limits (Most adults don’t come close to this, so your kid or teen is likely to be fine but it never hurts to check the IRS guidelines!)
To keep everything on the straight and narrow, it’s important that there is a paper trail of some kind when it comes to this money. So if your child isn’t paying taxes on the income, you likely want to explore other investment options, such as a custodial brokerage account with Vanguard.
For more details on how to hire your child and open a Roth IRA legally straight from a CPA, check out the Kids Money Academy. It's helped me a lot!
Is Vanguard friendly for Beginners?
The answer here is a bit complicated!
If we’re being totally honest, Vanguard doesn’t make the initial process to open a custodial Roth IRA as simple as it should. For better or for worse, Vanguard has a bit of a reputation when it comes to the user experience offered by its website and app.
However, Vanguard is absolutely friends for beginners in the sense that they put their investors first. Vanguard’s unique structure means that you are an account owner. So there’s no need to worry about them putting shareholders ahead of you–they’re one and the same at Vanguard! That’s part of why Vanguard has such a cult following of fans.
Another reason why we love Vanguard for beginners is that they really focus on low fees. If you’re new to investing, it’s easy to get overwhelmed by the fine print. A lot of people miss out on maximizing their money since they don’t notice the high fees that some companies charge. Vanguard pioneered low-cost “set it and forget it” investing, which is perfect for new investors.
How old do you need to be to open a Roth IRA?
To open a Roth IRA by yourself, you need to be 18 years old with earned income. However, if you want to open a custodial Roth IRA with Vanguard, you can do that on behalf of a minor as soon as they are old enough to have earned income. It’s one strategy that many families use to start building generational wealth!
Doug Nordman did this for his daughter when she was a teenager and now she is virtually “set” when it comes to retirement!
Final Thoughts on How to Open a Custodial Roth IRA with Vanguard
Is your child or teen earning their own income? Do you think they are ready to learn more about saving and investing? Then, it might be time to open a custodial Roth IRA for them.
This account is a powerful way to help them learn more about the magic of compound interest and grow their money more than a traditional savings account can. Opening a Roth IRA now can set the up for a lifetime of financial success.
If want to explore the nuances of hiring your child from the perspective of a CPA, check out the Kids Money Academy! I'm glad I did.
Have you helped your child open a custodial Roth IRA with Vanguard? How are you building financial literacy and generational wealth for your family?
Please let us know in the comments below.